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Inventories are assets of the firm and require investment & hence involve the commitment of firm’s resources. If inventories are too big , they become a strain on the resources, however , if too small , the firm may lose then sale. Therefore the firm must have an optimum level of inventory. The inventory means  & includes the goods & services being sold by the firm and raw materials or other components being used in the manufacturing of such goods and services.


i) Finished goods:

These are the goods which are either being purchased by the firm or are being produced or processed in the firm. These are just ready to sale for the customers. Inventories of financial goods arise because of the time involved in the production process and the need to meet the customers demand promptly. The purpose of finished goods inventory is to uncouple the production process & sales function so that it is not necessary to produce goods before a sales can occur and therefore sales can be made directly out of inventory.

ii) Work-in-progress:

It refers to the raw material engaged in the various phases of production schedule. It refers to partially produced goods. The degree of completion may vary for different units .The value of work in progress includes material costs, the direct wages and expenses already incurred and the overheads, if any. So , the work-in –progress inventory  contains partially produced / completed goods. The purpose of the work-in-progress inventory is to uncouple the various operations in the production process so that machine failure & stoppages in one operation will not affect the other operations.

iii) Raw materials:

The raw material include the material which are used in the production process and every manufacturing firm has to carry certain stock of raw material in stores. These units of raw material s are regularly issued/transferred to the production department  so that the production process is not interrupted by a shortage of these material. Its function is to uncouple the production function from the purchasing function i.e., to make these two functions independent of each other so that delay in the procurement of raw material do not cause production delays & the firm can satisfy its need for raw material out of  the inventory lying in the stores.

The classification of particular item a finished goods, work-in-progress, raw material  depends on kind of business being discussed.

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